Local market size, social capital and outsourcing: evidence from Emilia Romagna

Based on a unique dataset concerning small firms operating in the machinery and equipment industry in Emilia Romagna (Italy), we estimate the separate effects of social capital and local market size on the probability to either fully or partially outsource parts of the production process. We are able to distinguish 29 different phases of the production cycle, from design, to early processing to post-production. Our estimates show that: (i) social capital influences the full outsourcing of core assembly and post-assembly activities, while local market size affects the full outsourcing of early processing activities; (ii) neither social capital nor local market size have a statistically significant effect on the probability of partially outsourcing any step of the production process. Robustness tests confirm our results vis-à-vis the endogeneity of the local market size and social capital, and the potential Modifiable Area Unit Problem relating to local market size.